Tax Rates And Inflation - Prof. Luis Escamilla, Retiree Inco ✓ Solved

Tax Rates and Inflation Prof. Luis Escamilla Retiree Income

Prepare an Excel template that calculates cash flows by the month considering all the variables and information provided. Write the answers to his questions in an email format (a Word document) that is 600 words long (+/-10%).

Paper For Above Instructions

Dear [Retiree's Name],

I hope this email finds you well. It was great to see you recently, and I appreciate your confidence in me to help you with your retirement income analysis. Based on the information you've provided and our conversation, I have developed an Excel template that will help you project your cash flows over the upcoming years considering your savings, expenses, tax implications, and inflation.

First, let’s summarize your financial situation:

  • Annual Spending Budget: $70,500
  • Total Savings: $980,000 (IRA + Savings Account)
  • Savings Account Balance: $580,000
  • IRA Balance: $400,000
  • Annual Growth Rate of IRA: 8%
  • Annual Growth Rate of Savings Account: 6%
  • Age at Retirement: [Your Current Age]
  • Life Expectancy Estimation: At least 78 years, possibly more due to your healthy lifestyle.

With your current spending habits, your existing savings would last for approximately 8.3 years. As you've noted, this suggests you may face a shortfall before accessing your IRA. The following analysis will provide insight into your concerns about running out of money.

Cash Flow Projections

Using the Excel template, I've included the following variables to calculate monthly cash flows:

  • Monthly Spending Amount: $5,875 (annual spending divided by 12).
  • Monthly Earnings from Savings Account: $2,900 (using the 6% annual interest).
  • Monthly Earnings from IRA: At the moment you cannot touch this until you’re 70, but it is calculated as $2,666 (annually at 8%), so keep in mind for the future.

This template will illustrate how long your savings will last based on these withdrawals and interest calculations. Your total monthly inflow and outflow will help you understand if adjustments are necessary.

Will Your Savings Last?

Your concern about running out of money before reaching age 78 serves as a valid alert. As per your current budget, you would deplete the $580,000 savings account in about 83 months or approximately 7 years before you hit 70, at which point your IRA can be accessed.

The gap in existing cash will require you to consider how to reduce monthly expenses. If your savings account is indeed projected to last until you’re about 77, adjustments may be necessary. To bridge this gap, you could potentially reduce your monthly expenses to $5,000.

Withdrawal Timing and Amounts

Upon reaching age 70, you will start making required minimum distributions (RMDs) from your IRA. The IRS mandates that you withdraw a minimum amount based on your remaining life expectancy as calculated by a formula. Withdrawing from your IRA will also subject this amount to taxation.

Each IRA withdrawal becomes part of your taxable income for that year, adding complexity to your tax planning. To calculate how much tax you need to set aside, apply the relevant tax rates based on your income bracket for the year of withdrawal. It's wise to reevaluate your filing status each year to understand how tax brackets may affect your net income from these withdrawals.

Given your goal of sustaining your lifestyle, once you access your IRA, you may have to consider withdrawing amounts exceeding the minimum requirement to address your living expenses effectively.

Projected Inflation Impact

Inflation, as projected over the coming decades, will also impact your expenses. The cost of living in California tends to increase, and your current annual budget may not suffice in future years due to rising prices. Each indication of inflation should be factored into your overall financial strategy.

Conclusion

In summary, careful planning using the outlined Excel template for cash flows will assist in projecting your available funds through retirement. It’s critical to frequently revisit this financial plan, particularly with changing economic circumstances, and adjust your lifestyle as necessary.

Please feel free to reach out for any questions regarding this analysis or if there are any additional concerns. I look forward to our continued discussions on how best to navigate your retirement journey.

Best regards,

[Your Name]

References

  • U.S. Internal Revenue Service. (2019). Federal Tax Rates for Married Filing Jointly.
  • California Franchise Tax Board. (2019). State Tax Rates for Married Filing Jointly.
  • Congressional Budget Office. (2019). Updated Budget Projections: 2019 to 2029.
  • U.S. Social Security Administration. (2019). Life Expectancy Tables.
  • Marr, C., & Huang, C. (2018). The Effect of Retirement Resources on Financial Stability. Urban Institute.
  • Schmitt, J., & Warner, K. (2018). Managing Debt in Retirement: A Guide. Center for Economic Policy Research.
  • Frank, R. H., & Cook, P. J. (2017). Progressivity and Predictability in Tax Policy. W. W. Norton & Company.
  • Investopedia. (2021). Understanding Required Minimum Distributions.
  • Pew Research Center. (2021). Financial Realities in Retirement.
  • National Institute on Retirement Security. (2019). Retirement Security: A Crucial Challenge for the Future.

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